4-1

Financial Planning Model Ingredients 4.2

• Sales Forecast – many cash flows depend directly on the level of sales (often estimated using a growth rate in sales)

• Pro Forma Statements – setting up the financial plan in the form of projected financial statements allows for consistency and ease of interpretation

• Asset Requirements – how much additional fixed assets will be required to meet sales projections

LO3

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4-2

Ingredients Continued

• Financial Requirements – how much financing will we need to pay for the required assets

• Plug Variable – management decision about what type of financing will be used (makes the Statement of Financial Position balance)

• Economic Assumptions – explicit assumptions about the coming economic environment

LO3

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4-3

Example 1 – Historical Financial StatementsGourmet Coffee Inc.

Statement of Financial Position

December 31, 2011

Assets 1000 Debt 400

Equity 600

Total 1000 Total 1000

LO3

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4-4

Example 1 continued – Historical Statement of Comprehensive Income

Gourmet Coffee Inc.

Statement of Comprehensive Income

For Year Ended

December 31, 2011

Revenues 2000

Costs 1600

Net Income 400

LO3

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4-5

Example 1 continued - Pro Forma Statement of Comp. Income

• Initial Assumptions• Revenues will grow at

15% (2000*1.15)• All items are tied

directly to sales and the current relationships are optimal

• Consequently, all other items will also grow at 15%

Gourmet Coffee Inc.

Pro Forma Statement of Comprehensive Income

For Year Ended 2012

Revenues 2,300

Costs 1,840

Net Income 460

LO3

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4-6

Example 1 continued - Pro Forma Statement of Financial Position

• Case I• Dividends are the plug

variable, so debt and equity increase at 15%

• Dividends = 460 NI – 90 increase in equity = 370

Gourmet Coffee Inc.

Pro Forma Stmt. of Fin. Position

Case 1

Assets 1,150 Debt 460

Equity 690

Total 1,150 Total 1,150

LO3

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4-7

Example 1 continued - Pro Forma Statement of Financial Position

• Case II• Debt is the plug

variable and no dividends are paid

• Debt = 1,150 – (600+460) = 90

• Repay 400 – 90 = 310 in debt

Gourmet Coffee Inc.

Pro Forma Stmt. of Fin. Position

Case 1

Assets 1,150 Debt 90

Equity 1,060

Total 1,150 Total 1,150

LO3

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4-8

Percent of Sales Approach 4.3

• Some items tend to vary directly with sales, while others do not

• Statement of Comprehensive Income• Costs may vary directly with sales• If this is the case, then the profit margin is

constant• Dividends are a management decision and

generally do not vary directly with sales – this affects the retained earnings that go on the Statement of Financial Position

LO3

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4-9

Percentage of Sales Approach Continued

• Statement of Financial Position• Initially assume that all assets, including fixed,

vary directly with sales• Accounts payable will also normally vary

directly with sales• Notes payable, long-term debt and equity

generally do not vary with sales because they depend on management decisions about capital structure

• The change in the retained earnings portion of equity will come from the dividend decision

LO3

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4-10

Example 2 – Percentage of Sales Method

Tasha’s Toy Emporium

Statement of Comp. Income, 2011

% of Sales

Sales 5,000

Costs 3,000 60%

EBT 2,000 40%

Taxes (40%)

800 16%

Net Income 1,200 24%

Dividends 600

Add. To RE 600

Tasha’s Toy EmporiumPro Forma Statement of Comp.

Income, 2012

Sales 5,500

Costs 3,300

EBT 2,200

Taxes 880

Net Income 1,320

Dividends 660

Add. To RE 660Assume Sales grow at 10%

Dividend Payout Rate = 50%

LO3

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4-11

Example 2 – Percentage of Sales Method continued

Tasha’s Toy Emporium – Statement of Financial Position

Current % of Sales

Pro Forma

Current % of Sales

Pro Forma

ASSETS LIABILITIES & OWNERS’ EQUITY

Current Assets Current Liabilities

Cash $500 10% $550 A/P $900 18% $990

A/R 2,000 40 2,200 N/P 2,500 n/a 2,500

Inventory 3,000 60 3,300 Total 3,400 n/a 3,490

Total 5,500 110 6,050 LT Debt 2,000 n/a 2,000

Fixed Assets Owners’ Equity

Net PP&E 4,000 80 4,400 C Shares 2,000 n/a 2,000

Total Assets 9,500 190 10,450 RE 2,100 n/a 2,760

Total 4,100 n/a 4,760

Total L & OE 9,500 10,250

LO3

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